What Is a Merchanting Trade Transaction? The 2026 Guide to RBI Rules, FEMA Compliance & What Changes on 1 October

A merchanting trade transaction is a trade where an Indian entity buys goods from a seller in one foreign country and sells them to a buyer in another foreign country, with the goods shipping directly between those two countries and never entering India's Domestic Tariff Area. The Indian party is a principal, not a broker, it takes title, takes the risk, and keeps the margin between the import leg and the export leg. Merchanting trade is regulated by the Reserve Bank of India under FEMA, and both legs of the money must move through a single Authorised Dealer bank.

Now the part that matters more than the definition. The rulebook governing merchanting trade stops existing on 1 October 2026. On that date the Merchanting Trade Guidelines, 2020 are superseded, and six of the conditions a merchanting trader works to change at once - including the nine-month deadline, which disappears entirely.

So this guide does two things. It tells you the rules that apply to a transaction you start this week. And it tells you what those rules become in seven weeks, and what happens to the deal sitting open on your desk when they do.

Fast answer - find yourself here

If you have never done an MTT: you need a current account with an AD Category-I bank, a confirmed order from your overseas buyer, and goods that are freely importable and exportable under India's Foreign Trade Policy on the date of shipment. Both legs run through that one bank. Start today and you are under the 2020 rules; the cycle you open will almost certainly finish under the 2026 ones.

If you have a live cycle right now: the outer 9-month limit and the 4-month foreign exchange outlay cap apply until 30 September 2026. From 1 October the 9-month limit disappears and the outlay rule becomes a 6-month gap between remittances that your AD bank can extend. RBI has not said how open transactions are treated at the changeover.

If you are the CA or ops person signing off: the two things that change your file are the removal of the mandatory-profit condition and the shift of discretion from RBI circulars to your AD bank's own published SOP. From 1 October, "what are the RBI rules" is partly the wrong question. The right one is "what does my bank's policy say."

The two rulebooks, side by side

Until 30 September 2026, merchanting trade runs on the Merchanting Trade Guidelines, 2020 - issued by RBI as A.P. (DIR Series) Circular No. 20 dated 23 January 2020.

From 1 October 2026, it runs on the Foreign Exchange Management (Export and Import of Goods and Services) Regulations, 2026, notified vide Notification No. FEMA 23(R)/2026-RB dated 13 January 2026, with the accompanying Directions issued on 16 January 2026. On that date the 2020 Guidelines are superseded, along with the Master Directions on export and import and a schedule of 167 circulars.

Read that last row twice. It is the change with the longest tail.

What actually changes on 1 October 2026

1. The 9-month clock is gone. Under the 2020 Guidelines the whole cycle, from the first of shipment, import payment or export receipt, to the last of them had to close inside nine months. The 2026 Regulations simply do not carry that condition forward. Long-cycle commodity trades that were structurally impossible to run compliantly out of India become possible.

2. The outlay rule is replaced, not extended. This is not the four-month rule with a bigger number on it. The old rule capped your foreign exchange outlay - how long your money could be out the door before it came back. The new rule is different in kind: the period between the outward remittance and the inward remittance, or the other way round, must not exceed six months, and the AD bank may extend it. It cuts both ways now. If your buyer pays you first, you are on a clock too.

3. The profitability condition disappears. Today, RBI requires the merchanting trade to result in a profit, calculated by subtracting import payments and related expenses from export proceeds for that specific transaction. That means a genuine trade that goes underwater on an FX move is, on paper, a FEMA problem. From 1 October that condition is not in the regulations. If you have ever had to explain a thin or negative margin to a bank, you know why this matters.

4. Third-party payments become possible. Under the 2026 Regulations, outward remittance still goes to the overseas seller and inward still comes from the overseas buyer as the default, but the AD bank may permit payment to or receipt from a third party where you make a request with valid reasons. For anyone trading through group entities or regional treasury structures, this is the change that unlocks real structures.

5. Discretion moves from RBI to your bank. The 2026 framework requires AD banks to frame detailed internal policies and SOPs for handling and reporting these transactions, publish them on their websites, define who approves what, and run an escalation and appeal route for customer grievances. Banks are also barred from levying penalties for regulatory delays, and must route references to RBI through the PRAVAAH portal.

Note: RBI has stopped writing the rulebook and started writing the rules about who writes the rulebook. The practical consequence is that from October, two merchanting traders with identical transactions at two different banks can get two different answers, and both are compliant. Pick your AD bank on the strength of its trade desk, not its FX card rate.

What a merchanting trade transaction actually is

Kill this misconception now: merchanting trade is not drop-shipping with a bigger invoice, and it is not brokerage. In an MTT you buy the goods. Title passes to you. If the buyer walks, you are holding cargo in a foreign port. RBI's position under the 2020 Guidelines is explicit that merchanting traders must be genuine traders of goods and not mere financial intermediaries, and that AD banks must satisfy themselves you can actually perform the obligations under the order.

The defining test is physical, not financial: the goods must not enter India's Domestic Tariff Area. Not the port, not a bonded warehouse, not a transhipment stop that gets recorded on an Indian bill of entry. Cross that line and it stops being an MTT and becomes an import followed by an export, with the duty, the clearance and the paperwork that come with both.

One useful relaxation people miss: since the 2020 circular, goods under an MTT may undergo processing or value addition abroad, if the AD bank is satisfied with the documentary evidence. The earlier 2014 circular prohibited any transformation. If you were told years ago that MTT goods must ship untouched, that advice is a decade stale.

The failure modes that actually bite

These are the six that do the damage.

The bill of lading shows an Indian port. Your load port and discharge port must both be foreign. A routing that transhipments through Colombo is fine. One that transhipments through Nhava Sheva and generates Indian customs documentation is not. Check the routing before the booking is confirmed, not when the BL lands in your inbox.

You opened the import leg at one bank and the export leg at another. Both legs must go through the same AD bank. This trips up traders who have a good FX rate at one bank and a good credit line at another. There is no fix after the fact, you are asking your bank to regularise a transaction it cannot see half of.

The buyer paid you first and the money sat in the current account. Under the rules in force until 30 September, if export proceeds arrive before you pay the supplier, those funds must be parked in an EEFC account or an interest-bearing INR account until the import leg falls due, and then used for it. Letting that sit in your operating account is a live breach today. From 1 October the compulsion goes, but do not apply the new rule to a transaction settling in September.

One-to-one matching in EDPMS and IDPMS. AD banks are required to match each leg against the other, transaction by transaction, and report defaults to RBI's concerned Regional Office half-yearly, within 15 days of the close of the June and December half-years. An unmatched entry is not a filing nuisance. It is a countdown to a default report with your name on it.

The caution-list trigger nobody quotes. Under the 2020 Guidelines, merchanting traders with outstandings of 5% or more of their annual export earnings are liable for caution-listing. Not five transactions, five percent. A single large stuck deal against a modest export book can put you over. The 2026 Regulations drop formal caution-listing, replacing it with a rule that if receivables stay unpaid more than a year past the due date, you may export only against full advance or a confirmed irrevocable letter of credit. Softer label, similar bite.

Agency commission, paid quietly. Today it is prohibited except in exceptional circumstances, and then only after the MTT is complete and only if paying it does not push the trade into a loss. The 2026 Regulations drop the prohibition, but do not expressly permit it either. Do not budget for it until your bank's SOP says so in writing.

The step-by-step process

Before step 1 - the prerequisite that causes most of the failures. You need a confirmed order from your overseas buyer before you commit the import leg. This is not a commercial best practice, it is the structural assumption the entire framework rests on. It is why RBI permits a letter of credit to your supplier against a confirmed export order, and it is why banks ask for both contracts together. Commit the import leg on a verbal indication from the buyer and you have manufactured your own timeline problem.

1. Sign both contracts. Purchase contract with the overseas seller, sales contract with the overseas buyer. Back to back, with the delivery instruction in the purchase contract naming the buyer's port.
2. Confirm the goods are FTP-eligible. They must be permitted for both import and export under India's Foreign Trade Policy on the date of shipment. Restricted items need the licence; prohibited items are out regardless of margin.
3. Open the file with one AD bank. Give them both contracts up front. Ask for their merchanting trade SOP in writing — from October they are required to publish it.
4. Arrange the shipment foreign-to-foreign. Verify load and discharge ports on the draft BL. If you are using a switch bill of lading to keep your supplier and buyer apart, tell the bank now, not later.
5. Handle the import leg payment. Short-term suppliers' or buyers' credit is permitted to the extent the transaction is not backed by an advance remittance for the export leg. Letters of undertaking and letters of comfort are not permitted for that credit. If you are paying an advance above USD 500,000 per transaction, it must be backed by a bank guarantee or an unconditional, irrevocable standby letter of credit from an international bank of repute.
6. Receive the export leg proceeds. Match against the import leg. Close the EDPMS and IDPMS entries.

Documents your bank will ask for: purchase contract, sales contract, commercial invoices for both legs, the foreign-to-foreign bill of lading or airway bill, packing list, and insurance documents. Where originals are unavailable, non-negotiable copies authenticated by the bank handling the documents are acceptable.

The single most common rejection reason: a transport document that does not prove foreign-to-foreign movement on its face. Everything else can be explained. That cannot.

The straddle problem: deals open on 1 October

Read this section with the appropriate caution. It deals with a question that does not yet have a settled answer.

If you ship in August 2026 on a 9-month cycle, that cycle closes in May 2027. It will spend six weeks under the 2020 Guidelines and the rest under a framework where the 9-month limit does not exist. The 2026 Regulations do not say what happens to transactions already in flight. Independent reviews of the framework have specifically flagged ongoing and legacy transactions as an unaddressed gap.

The honest position is that RBI has not addressed this and the banks have not published their SOPs yet. There is no definitive answer available right now, and treating one as settled is how a compliant transaction becomes a regularisation request.

What to do about it: for any cycle you open between now and 30 September, get your AD bank's treatment of the changeover in writing before you commit the import leg. Not a phone call with the relationship manager, an email you can put in the file. Banks are being handed unusual discretion here, and discretion exercised in October against an assumption you made in August is the kind of thing that turns into a regularisation request to a Regional Office.

GST on merchanting trade

No GST. Paragraph 7 of Schedule III of the CGST Act, 2017 treats the supply of goods from a place in the non-taxable territory to another place in the non-taxable territory, without the goods entering India, as neither a supply of goods nor a supply of services. It was inserted by Section 32 of the CGST (Amendment) Act, 2018, and came into force 1 February 2019 via Notification No. 2/2019-Central Tax dated 29 January 2019. Two dates sit close together there and get conflated, the notification is dated January, the provision takes effect in February.

The trap sits on the other side of that exemption. Because the transaction is outside GST's scope entirely, you cannot claim input tax credit on expenses attributable to it, bank charges, professional fees, and the rest. Report these in the exempt / non-GST supply section of your returns. Traders who model MTT margins on their domestic ITC assumptions find the gap at year end, not at transaction time.

Related structures you will be asked to compare

High sea sales. Frequently confused with merchanting trade, and the confusion is expensive. In a high sea sale the goods are already heading to India and title transfers in transit, before customs clearance, the goods do enter Indian territory and someone files a Bill of Entry. In an MTT they never do. The duty and GST consequences diverge completely, and so does who carries the reporting obligation.

Switch bill of lading. The instrument that keeps your supplier and your buyer from discovering each other, by replacing the original BL with a second set naming you as shipper. Legitimate and common in merchanting trade, and the document most likely to attract scrutiny from your bank's trade desk, because it changes what the transport document says on its face. Ask your AD bank how they treat it before the booking, not after.

EEFC account. Until 30 September, this is where an early export receipt has to sit. After that the compulsion goes, but it remains the cheapest way to hold foreign currency against a known outflow rather than converting twice, see our explainer on the EEFC account. Import-leg financing also differs from a straight import, which our guide to payment methods in import trade covers side by side.

When the export leg lands

Once your buyer's payment arrives and both legs match, the trade is done, but the money still has to reach you cleanly, and the FX spread on the export leg is where a large share of a thin merchanting margin quietly disappears. EximPe's global trade account handles inward trade receipts with online regularisation and e-BRC generation, at 50% better FX margins than a standard bank counter.

One limit worth stating plainly, because it decides whether this is relevant to you: both legs of a merchanting trade must run through the same AD bank, and the 2026 Regulations did not relax that. You cannot bring in a separate provider for the export leg alone mid-cycle, the account has to be the AD relationship you run the whole transaction on, set up before the first leg moves.

Frequently Asked Q